<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended Commission File Number:
March 31, 2000 0-23021
EDUTREK INTERNATIONAL, INC.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Georgia 58-2255472
- -------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 Embassy Row, 6600 Peachtree Dunwoody Road, Atlanta, Georgia 30328
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
404-965-8000
- -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not applicable
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Class A Common Stock, without par value 4,535,095 shares
--------------------------------------- ---------------------------
Class Outstanding at May 3, 2000
Class B Common Stock, without par value 7,359,667 shares
--------------------------------------- ---------------------------
Class Outstanding at May 3, 2000
<PAGE> 2
EduTrek International, Inc.
Form 10-Q Index
<TABLE>
<CAPTION>
PAGE
----
PART I - FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements 1
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 6
Item 3. Qualitative and Quantitative Disclosures About Market Risk 11
PART II. - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
</TABLE>
<PAGE> 3
This Quarterly Report on Form 10-Q contains forward-looking statements.
Additional written or oral forward-looking statements may be made by the
Company from time to time in filings with the Securities and Exchange
Commission or otherwise. The words "believe," "plan," expect," "anticipate,"
"project," and similar expressions identify forward-looking statements, which
speak only as of the date the statement was made. Such forward-looking
statements are within the meaning of that term in Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of
1934, as amended. Such statements may include, but are not limited to,
projections of revenues, income or loss, expenses, capital expenditures, plans
for future operations, financing needs or plans, the impact of inflation, and
plans relating to products or services of the Company, as well as assumptions
relating to the foregoing. The Company undertakes no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events, or otherwise.
Forward-looking statements are inherently subject to risks and
uncertainties, some of which cannot be predicted or quantified. Future events
and actual results could differ materially from those set forth in,
contemplated by, or underlying the forward-looking statements. Forward looking
statements contained in this Quarterly Report regarding the Company's plans for
its future business activities depend upon the Company's ability to first
address and alleviate the financial difficulties described under "Recent
Developments" in the Company's Annual Report on Form 10-K as filed with the
Securities and Exchange Commission. In addition, statements in this Quarterly
Report, including Notes to Consolidated Financial Statements and "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
describe factors, among others, that could contribute to or cause such
differences. Additional factors that could cause actual results to differ
materially from those expressed in such forward-looking statements include,
without limitation, new or revised interpretations of other applicable laws,
rules and regulations, failure to maintain or renew required regulatory
approvals, accreditation or state authorizations, failure to obtain the
Southern Association of Colleges and Schools' ("SACS") approval to operate in
new locations, failure to comply with Department of Education or state
financial responsibility standards, changes in student enrollment, and other
factors set forth in the Company's Annual Report on Form 10-K and other reports
or materials filed or to be filed with the Securities and Exchange Commission
(as well as information included in oral statements or other written statements
made or to be made by the Company or its management).
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<PAGE> 4
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
EDUTREK INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
---------- ----------
(unaudited)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 4,828 $ 3,061
Accounts receivable -- net of allowance of $2,148 and $1,985, respectively 5,283 2,444
Income taxes receivable 246 1,717
Other 1,214 1,123
---------- ----------
Total current assets 11,571 8,345
Property, plant, and equipment -- net of accumulated depreciation 19,356 19,414
Goodwill -- net of accumulated amortization of $3,555 and $3,303, respectively 37,104 37,357
Other 1,649 1,792
---------- ----------
$ 69,680 $ 66,908
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 3,190 $ 4,060
Accrued expenses 3,438 3,482
Accrued related party transactions 59 112
Value-added tax payable 314 445
Unearned revenues 10,522 9,412
Restructure accrual - current 3,753 3,970
Line of credit 12,662 10,687
Current maturities -- capital leases and other 1,995 2,197
---------- ----------
Total current liabilities 35,933 34,365
Capital leases and other -- less current maturities 7,005 7,498
Deferred rent 2,567 2,346
Restructure accrual - long term 806 834
Other liabilities 1,240 250
---------- ----------
Total liabilities 47,551 45,293
SHAREHOLDERS' EQUITY
Common stock, Class A voting, one vote per share, without par value, 40,000,000
shares authorized, 4,535,095 and 4,485,168 issued and outstanding, respectively 36,738 36,737
Common stock, Class B voting, ten votes per share, without par value, 10,000,000
shares authorized, 7,359,667 issued and outstanding 4,973 4,973
Accumulated other comprehensive income (Loss) (37) (33)
Accumulated deficit (19,545) (20,062)
---------- ----------
Total shareholders' equity 21,129 21,615
========== ==========
$ 69,680 $ 66,908
========== ==========
</TABLE>
See notes to consolidated financial statements.
<PAGE> 5
EDUTREK INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
2000 1999
---------- ----------
(unaudited) (unaudited)
<S> <C> <C>
Net revenues $ 21,008 $ 16,733
Costs and expenses:
Cost of education and facilities 10,933 8,570
Selling and promotional expenses 2,750 2,938
General and administrative expenses 5,337 4,562
Amortization of goodwill 252 252
---------- ----------
Total costs and expenses 19,272 16,322
---------- ----------
Income from operations 1,736 411
Interest expense 463 255
Other income -- net 21 32
---------- ----------
Income before income taxes and minority interest 1,294 188
Income tax (provision) benefit 0 103
---------- ----------
Income before minority interest 1,294 291
Minority interest in earnings of American University in Dubai (777) (697)
---------- ----------
Net income (loss) $ 517 $ (406)
========== ==========
Earnings (Loss) Per Share:
Basic net income (loss) per share $ 0.04 $ (0.04)
Diluted net income (loss) per share $ 0.04 $ (0.04)
Average shares outstanding 11,848 10,661
Dilutive effect:
Warrants -- --
Options 100 --
---------- ----------
100 --
---------- ----------
Average shares outstanding assuming dilution 11,948 10,661
</TABLE>
See notes to consolidated financial statements.
<PAGE> 6
EDUTREK INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended March 31,
2000 1999
----------- -----------
(unaudited) (unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 517 $ (406)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 1,172 815
Bad debt expense 163 131
Increase (decrease) in restructuring (245) --
(Increase) decrease in accounts receivable (3,002) (1,516)
(Increase) decrease in income taxes receivable 1,471 --
Increase (decrease) in accounts payable and accrued liabilities (967) (787)
Increase (decrease) in unearned revenues 1,110 181
Increase (decrease) in value-added taxes payable (131) (34)
Other 1,138 286
--------- --------
Net cash provided by (used in) operating activities 1,226 (1,330)
--------- --------
INVESTING ACTIVITIES
Additions to curriculum development costs (74) (198)
Purchases of property, plant, and equipment (661) (1,615)
--------- --------
Net cash used in investing activities (735) (1,813)
--------- --------
FINANCING ACTIVITIES
Net receipts -- line of credit 1,975 5,100
Principal payments under capital lease obligations (695) (370)
Principal repayments on long-term debt -- (130)
Other -- 12
--------- --------
Net cash provided by (used in) financing activities 1,280 4,612
--------- --------
Effect of exchange rate changes on cash (4) (16)
--------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,767 1,453
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,061 2,779
--------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 4,828 $ 4,232
========= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 493 $ 275
Income taxes -- --
Non-cash investing activities:
Acquisition of property through capital leases $ 33 $ 1,521
</TABLE>
See notes to consolidated financial statements.
<PAGE> 7
EDUTREK INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
STOCKHOLDERS' COMPREHENSIVE ACCUMULATED
PREDECESSOR COMMON STOCK PAID-IN CAPITAL NOTES INCOME DEFICIT TOTAL
- ----------- ------------ --------------- ------------- ------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance -- May 31, 1996 $ 1 $ 477 $ (4,559) $ 102 $ (3,309) $ (7,288)
Distribution to shareholders (1,890) (1,890)
Capital contributed by stockholder 1,239 1,239
Comprehensive loss:
Net loss (1,305) (1,305)
Foreign currency translation (18) (18)
--------
Total comprehensive loss (1,323)
Notes receivable and advances from shareholders (1,016) (1,016)
-------- -------- -------- ----- -------- --------
Balance -- October 8, 1996 $ 1 $ 477 $ (5,575) $ 84 $ (5,265) $(10,278)
======== ======== ======== ===== ======== ========
</TABLE>
<TABLE>
<CAPTION>
COMMON STOCK --
NUMBER OF SHARES COMMON STOCK
--------------------- ------------------------
COMPANY CLASS A CLASS B CLASS A CLASS B
- ------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Issuance of common stock -- July 1, 1996 2,240 $ 1,000
Issuance of common stock in connection with
the acquisition of EduTrek Systems, Inc. 105 1,995
Sale of common stock in connection with
acquisition of Predecessor 2,100 3,000
Issuance of common stock in exchange for
certain fees 350 $ 500
Issuance of warrants in connection with
acquisition of Predecessor
Issuance of common stock in exchange for
stock of Predecessor 210 787
Comprehensive income:
Foreign currency translation
Net income
Total comprehensive income
----- ------ -------- --------
Balance -- May 31, 1997 665 6,335 1,287 4,000
Issuance of common stock net of initial public offering
costs -- September 29, 1997 2,733 34,560
Conversion of warrants to common stock 879 677
Conversion of Class B Common Stock to Class A
Common Stock 42 (42) 27 (27)
Issuance of common stock under stock option plan 16 13
Comprehensive income:
Foreign currency translation
Net income
Total comprehensive income
----- ------ -------- --------
Balance -- May 31, 1998 4,335 6,293 36,564 3,973
Issuance of common stock under stock option plan 28 47
Comprehensive loss:
Foreign currency translation
Net loss
Total comprehensive loss
----- ------ -------- --------
Balance -- December 31, 1998 4,363 6,293 36,611 3,973
Issuance of common stock under stock option plan 81 93
Issuance of common stock under the Employee Stock Purchase Plan 41 33
Issuance of Class B common stock in exchange for Steve Bostic convertible debt 1,067 1,000
Comprehensive loss:
Foreign currency translation
Net loss
Total comprehensive loss
----- ------ -------- --------
Balance -- December 31, 1999 4,485 7,360 $ 36,737 $ 4,973
===== ====== ======== ========
Issuance of common stock under stock option plan 1 $ 1
Issuance of common stock under the Employee Stock Purchase Plan
Comprehensive loss:
Foreign currency translation
Net income
Total comprehensive income
----- ------ -------- --------
Balance -- March 31, 2000 4,486 7,360 36,738 4,973
===== ====== ======== ========
<CAPTION>
ACCUMULATED RELATED
COMMON OTHER EARNINGS
STOCK COMPREHENSIVE (ACCUMULATED
WARRANTS INCOME (LOSS) DEFICIT) TOTAL
-------- ------------- ------------ --------
<S> <C> <C> <C> <C>
Issuance of common stock -- July 1, 1996 $ 1,000
Issuance of common stock in connection with
the acquisition of EduTrek Systems, Inc. $ (237) (237)
Sale of common stock in connection with
acquisition of Predecessor 3,000
Issuance of common stock in exchange for
certain fees 500
Issuance of warrants in connection with
acquisition of Predecessor 677 677
Issuance of common stock in exchange for
stock of Predecessor 787
Comprehensive income:
Foreign currency translation $ 147 147
Net income 2,003 2,003
--------
Total comprehensive income 2,150
----- ------ -------- --------
Balance -- May 31, 1997 677 147 1,766 7,877
Issuance of common stock net of initial public offering
costs -- September 29, 1997 34,560
Conversion of warrants to common stock (677) --
Conversion of Class B Common Stock to Class A
Common Stock --
Issuance of common stock under stock option plan 13
Comprehensive income:
Foreign currency translation (59) (59)
Net income 1,903 1,903
--------
Total comprehensive income 1,844
----- ------ -------- --------
Balance -- May 31, 1998 -- 88 3,669 44,294
Issuance of common stock under stock option plan 47
Comprehensive loss:
Foreign currency translation (64) (64)
Net loss
(5,516) (5,516)
--
Total comprehensive loss (5,580)
----- ------ -------- --------
Balance -- December 31, 1998 -- 24 (1,847) 38,761
Issuance of common stock under stock option plan 93
Issuance of common stock under the Employee Stock Purchase Plan 33
Issuance of Class B common stock in exchange for Steve Bostic convertible debt 1,000
Comprehensive loss:
Foreign currency translation
Net loss (18,215) (18,215)
--------
Total comprehensive loss (18,272)
----- ------ -------- --------
Balance -- December 31, 1999 -- $ (33) $(20,062) $ 21,615
===== ====== ======== ========
Issuance of common stock under stock option plan 1
Issuance of common stock under the Employee Stock Purchase Plan --
Comprehensive loss: --
Foreign currency translation (4) (4)
Net income 517 517
--------
Total comprehensive income 513
----- ------ -------- --------
Balance -- March 31, 2000 -- $ (37) $(19,545) $ 21,129
===== ====== ======== ========
</TABLE>
See notes to consolidated financial statements.
<PAGE> 8
EduTrek International, Inc.
Notes to Consolidated Financial Statements
(unaudited)
Note 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and disclosures required by generally accepted accounting
principles for complete financial statements. These unaudited financial
statements include all adjustments, consisting of only normal, recurring
accruals, which EduTrek International, Inc. (the "Company") considers necessary
for a fair presentation of the financial position and the results of operations
for these periods.
The results of operations for the three months ended March 31, 2000 are
not necessarily indicative of the results to be expected for the full year
ending December 31, 2000. For further information, refer to the Company's
consolidated financial statements and notes thereto for the fiscal year ended
December 31, 1999 included in the Annual Report on Form 10-K, the 7 month
transition period from June 1, 1998 to December 31, 1998 included in the
Transition Report on Form 10-K, and the fiscal year ended May 31, 1998 included
in the Annual Report on Form 10-K, all items as filed with the Securities and
Exchange Commission.
Note 2 - U.S. and Foreign Operations
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" establishes standards for the way that public business enterprises
report information about operating segments and related information in
financial statements. SFAS No. 131 uses the management approach for determining
what operating segment information to report. The management approach is based
on the way that management organizes the operating segments within the Company
for making decisions and assessing performance. The Company operates solely in
the education industry, and management makes decisions and assesses performance
based on the geographic locations of its campuses. Therefore, the Company has
elected to report segment information based on geographic areas.
<PAGE> 9
The Company's operations are located in the United States, the United
Kingdom, and Dubai, United Arab Emirates. Net revenues and income (loss) from
operations by geographic area for the three months ended March 31, 2000 and
1999 and identifiable assets by geographic area at March 31, 2000 and December
31, 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
2000 1999
-------- --------
<S> <C> <C>
Net revenues:
United States $ 13,555 $ 9,752
United Kingdom 5,045 4,794
Dubai, UAE 2,408 2,187
-------- --------
Total $ 21,008 $ 16,733
======== ========
Income (loss) from operations:
United States $ 700 $ 568
United Kingdom 2,088 2,112
Dubai, UAE 1,151 1,072
Home Office (2,203) (3,341)
-------- --------
Total $ 1,736 $ 411
======== ========
<CAPTION>
March 31, 2000 December 31, 1999
-------------- -----------------
<S> <C> <C>
Identifiable assets:
United States $ 63,409 $ 62,248
United Kingdom 2,641 2,302
Dubai, UAE 3,630 2,358
-------- --------
Total $ 69,680 $ 66,908
======== ========
</TABLE>
Note 3 - Line of Credit
The Company finances its operating activities and capital requirements,
including debt repayment, principally from cash provided by operating activities
and borrowings under bank facilities. The Company has a $10,000,000 revolving
line of credit ("Line A") and a $4,350,000 revolving line of credit ("Line B")
with a bank (collectively, as amended, the "Credit Agreement"). The Credit
Agreement is secured by substantially all of the Company's assets.
Line A, as amended, matures on the earlier of April 30, 2001, or 30 days
after demand for payment by the bank. Amounts outstanding bear interest at the
London Interbank Offered Rate ("LIBOR") plus 2.75%. At March 31, 2000, the
Company had outstanding borrowings under Line A of $8,088,640. In addition, the
Company had issued $1,911,360 in letters of credit against Line A. These letters
of credit are required as security under building leases in Los Angeles,
Washington, D.C., and Miami.
Line B, as amended, matures on the earlier of September 30, 2000, or 30
days after demand for payment by the bank. Line B requires that the principal
amount outstanding must be reduced to $3,500,000 by July 1, 2000. Line B amounts
outstanding bear interest at the Prime rate plus 2.00%. At March 31, 2000, the
Company had outstanding borrowings under Line B of $4,350,000.
The Company agreed to pay the bank a fixed Arrangement Fee of $750,000, of
which $250,000 was charged to operations in 1999. The remaining $500,000 is
being charged to operations at the rate of $62,500 per month commencing in
February 2000. This entire Arrangement Fee is payable on the later of (1) the
Facility B termination date or (2) the Termination Date of the Credit Agreement.
The Company also agreed to pay a Contingent Arrangement Fee to the bank equal
to: (a) $200,000 upon failure of the Company to deliver to the bank by April 15,
2000, a letter of intent for the sale of assets or stock of the Company that
generates sufficient proceeds to pay all amounts due to bank and (b) $200,000
upon failure of the Company to deliver to the bank by June 15, 2000, a
definitive executed contract for the sale of assets or stock of the Company that
generates sufficient proceeds to pay all amounts due to bank. The Bank has
asserted that the April 15 requirement has not been met under the terms of the
credit agreement, and the matter is currently under negotiation.
The Credit Agreement requires interest only payments until maturity, except
for the required principal reductions described above. While the Company
believes it will be able to make the regular interest payments, based on
management's current projected earnings and cash flow, its ability to make the
required payments of principal on a timely basis is presently in doubt.
Note 4 - Related Party Transactions
Three members of the family of the Company's Chairman and Chief Executive
Officer terminated their employment with EduTrek International, Inc. during the
three months ended June 30, 1999. Termination payments of approximately $247,000
were accrued in June 1999 with payments scheduled through May 2000. As of March
31, 2000, there was approximately $58,740 remaining to be paid. One member of
the family was rehired effective May 1, 2000, compensation payments will begin
upon expiration of the previously discussed termination agreement.
<PAGE> 10
Note 5 - Company Restructuring Activities
In December 1999, the Company's Executive Officers and Board of Directors
implemented procedures to restructure the Company in three different areas in
order to reduce overall expenditures and restore positive cash flow of the
Company. The three areas of restructure were: 1) reduction of Corporate
overhead through elimination and consolidation of positions and space
reductions, 2) the teach-out of current classes in the Washington D.C. campus
and closure of the operation, and 3) termination of the lease for the current
Northern Virginia campus site (operations never commenced in Northern
Virginia), with plans for a new Northern Virginia site yet to be finalized. As
a result, the Company established restructuring accruals at December 31, 1999
totaling $4.8 million. The accrual for severance and employment contracts
included 16 employees. Revenue and income from operations of the Washington
D.C. campus were $2,527,452 and ($2,075,102), respectively, for the year ended
December 31, 1999, and $216,284 and ($704,000), respectively, for the seven
months ended December 31, 1998 (the campus began operations in October 1998).
The following table shows the components of the restructure accrual, and
restructuring activities through March 31, 2000:
<TABLE>
<CAPTION>
- ---------------------------------------------- ------------------------- ---------------------------------
ACCRUAL CATEGORY ORIGINAL ACCRUAL AMOUNT PAYMENTS THROUGH MARCH 31, 2000
- ----------------------------------------------- ------------------------- ---------------------------------
<S> <C> <C>
Lease termination and other related costs $4,137,135 $148,925
- ----------------------------------------------- ------------------------- ---------------------------------
Severance and employment contracts,
and other related costs $ 666,340 $ 95,836
- ----------------------------------------------- ------------------------- ---------------------------------
</TABLE>
Note 6 - Going Concern
The consolidated financial statements for the fiscal year ended December
31, 1999 were prepared assuming the Company would continue as a going concern.
The Company has reported net losses of $18.2 million for the year ended
December 31, 1999 and $5.5 million for the seven-month transition period ended
December 31, 1998. The Company is highly leveraged and recent developments have
had a material adverse effect on the Company's short-term liquidity and ability
to service its debts. As of March 31, 2000, the Company had $8.1 million of
debt outstanding under Line A of the Credit Agreement, which matures at the
earlier of April 30, 2001, or 30 days after the demand of the lender.
Additionally, there is $1.9 million of letters of credit issued on behalf of
the Company. The Company has an additional $4.3 million outstanding under Line
B of the Credit Agreement which is required to be reduced to $3.5 million as of
July 1, 2000, with remaining maturity on September 30, 2000.
Based upon management's current projected earnings and cash flow of the
Company, without some form of capital infusion, pursuant to business
combinations, strategic investment in the Company, or a refinancing of the
Company's debt, or a combination thereof, management cannot be certain it will
have the financial resources to make the required debt payments under its line
of Credit Agreement when due in years 2000 and 2001. As a result, the Company
has retained The Robinson-Humphrey Company LLC to assist in determining
short-term and long-term financial requirements and to evaluate potential
refinancing and restructuring alternatives.
If the Company does not make either the July 1, 2000, September 30, 2000,
or the April 30, 2001 required debt payments, it may be unable to continue its
normal operations, except to the extent permitted by its lender. Substantially
all of the Company's assets are pledged as collateral under the line of credit.
In addition, the Company failed to meet the financial responsibility
standards of the Department of Education as of December 31, 1999. As a result,
management anticipates that the Company may be required to post a letter of
credit of approximately $15.0 million with the Department of Education by July
2000. Therefore, the Company is evaluating certain approaches to restructuring
or recapitalization to address this failure. These potential approaches include
among other things, business combinations, a strategic investment in the
Company, or a refinancing of the Company's debt, or a combination thereof. The
objective is for the Company to raise sufficient capital to correct the
financial responsibility deficiencies, and also to post any letters of credit
required by the Department of Education. Failure to post a letter of credit
would result in the termination of the Company as an institution eligible
<PAGE> 11
for student Title IV financial aid, which would severely and negatively affect
cash flows of the Company and possibly result in the Company being unable to
continue its normal operations.
Certain states in which the Company operates have regulatory agencies which
perform their own financial capability reviews based on annual fiscal year
results. These reviews include fiscal responsibility tests, which the Company
did not comply with, as of December 31, 1999. Management believes that, by
successfully addressing the financial responsibility standards of the
Department of Education, it will meet the financial requirements of all the
states in which it operates, although there can be no assurance of such.
These matters raise substantial doubt about the Company's ability to
continue as a going concern. The consolidated financial statements for the three
months ended March 31, 2000 and the fiscal year ended December 31, 1999, did not
include any adjustments that might result from the outcome of this uncertainty.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion of the results of operations and financial
condition of the Company should be read in conjunction with the consolidated
financial statements and notes thereto for the three months ended March 31,
2000 included in Item 1 of this report, the "Selected Consolidated Financial
Data" and the Company's consolidated financial statements and notes thereto for
the fiscal year ended December 31, 1999 included in the Company's Annual Report
on Form 10-K, the 7 month transition period from June 1, 1998 to December 31,
1998 included in the Company's Transition Report on Form 10-K , as well as in
conjunction with the Company's Annual Report on Form 10-K for the fiscal year
ended May 31, 1998. Unless otherwise specified, any reference to a "fiscal
year" is to a fiscal year ended December 31.
<PAGE> 12
Results of Operations
The following table sets forth, for the periods indicated, the
percentage relationship of certain statement of operations items to net
revenues for the Company:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
2000 1999
----------------------------
<S> <C> <C>
Net revenues 100.0% 100.0%
Costs and expenses:
Cost of education and facilities 52.0% 51.2%
Selling and promotional expenses 13.1% 17.6%
General and administrative expenses 25.4% 27.3%
Amortization of goodwill 1.2% 1.5%
------ ------
Total costs and expenses 91.7% 97.5%
------ ------
Income from operations 8.3% 2.5%
Interest expense 2.2% 1.5%
Other income -- net 0.1% 0.2%
------ ------
Income before income taxes and minority interest 6.2% 1.1%
Income tax (provision) benefit 0.0% 0.6%
------ ------
Income before minority interest 6.2% 1.7%
Minority interest in earnings of American University in Dubai -3.7% -4.2%
------ ------
Net income (loss) 2.5% -2.4%
</TABLE>
<PAGE> 13
Three Months Ended March 31, 2000 Compared to Three Months Ended March 31, 1999
NET REVENUES. Net revenues increased approximately $4.3 million or 25.5%. The
increase was due to an increase in student enrollment primarily at the four
Power Campuses and a tuition increase for both Traditional and Power Campuses.
COST OF EDUCATION AND FACILITIES. Cost of education and facilities increased
approximately $2.4 million or 27.6%. Education costs increased approximately
$1.3 million or 22.7% due to an increase in the number of faculty supporting
the Power Campuses in conjunction with the campuses' enrollment growth, as well
as the related courseware, computer and other education costs. Facility costs
increased approximately $1.1 million or 37.5% as the result of space growth in
conjunction with the Power Campuses enrollment growth, as well as the cost of
maintaining dual sites for some locations during the transition to larger or
more accommodating locations. For the reasons set forth above, cost of
education and facilities increased as a percentage of net revenues to 52.0% in
the 2000 period from 51.2% in the 1999 period.
SELLING AND PROMOTIONAL EXPENSES. Selling and promotional expenses decreased
approximately $188,000 or 6.4%. The decrease was a direct result of the cost
control efforts instituted by the Company and the more focused marketing
initiatives for both the Traditional and Power Campuses. As a percentage of net
revenues, selling and promotional expenses decreased to 13.1% in the 2000
period from 17.6% in the 1999 period.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased approximately $775,000 or 17.0%. The increase was primarily due to
additions throughout 1999 of personnel at the new Power Campuses and the home
office to support the Company's growth. The increase also reflects the effects
of higher banking charges incurred for the liquidity challenges faced by the
Company in the 2000 period. As a percentage of net revenues, however, general
and administrative expenses decreased to 25.4% in the 2000 period from 27.3% in
the 1999 period.
AMORTIZATION OF GOODWILL. Goodwill amortization of $252,000 for both periods
was the result of the October 1996 acquisition of American European Corporation
and Subsidiaries with goodwill costs being amortized over a 40-year period.
INTEREST EXPENSE. Interest expense increased approximately $208,000 or 81.6% as
a result of increased outstanding borrowings under the Company's revolving line
of credit.
OTHER INCOME -- NET. Other income -- net decreased approximately $11,000.
INCOME TAX (PROVISION) BENEFIT. The Company does not have a tax provision for
the three months ended March 31, 2000 as a result of the utilization of the net
operating loss carryforward.
MINORITY INTEREST IN EARNINGS OF AMERICAN UNIVERSITY IN DUBAI. Minority
interest in earnings increased approximately $80,000 or 11.5% due to an
increase in operating income at the Dubai campus.
NET INCOME (LOSS). For the reasons set forth above, the Company experienced net
income of approximately $517,000 for the 2000 period compared to a net loss of
approximately $406,000 for the 1999 period.
<PAGE> 14
SEASONALITY
The Company experiences seasonality in its results of operations primarily
as a result of changes in the level of student enrollments. While the Company
enrolls students throughout the year, the Company's second and third fiscal
quarter enrollments and related revenues generally are lower than the first and
fourth fiscal quarters due to traditionally lower student enrollment levels in
the summer. Second and third fiscal quarter costs and expenses are higher as a
percentage of net revenues as a result of certain fixed costs which are not
significantly affected by the seasonal second and third fiscal quarter declines
in net revenues. This seasonality is partially mitigated by the technology
education programs which are offered throughout the year at Power Campuses in
California, Georgia, Florida, and the District of Columbia.
LIQUIDITY AND CAPITAL RESOURCES
The Company finances its operating activities and capital requirements,
including debt repayment, principally from cash provided by operating activities
and borrowings under bank facilities. The Company has a $10,000,000 revolving
line of credit ("Line A") and a $4,350,000 revolving line of credit ("Line B")
with a bank (collectively, as amended, the "Credit Agreement"). The Credit
Agreement is secured by substantially all of the Company's assets.
Line A, as amended, matures on the earlier of April 30, 2001, or 30 days
after demand for payment by the bank. Amounts outstanding bear interest at the
London Interbank Offered Rate ("LIBOR") plus 2.75%. At March 31, 2000, the
Company had outstanding borrowings under Line A of $8,088,640. In addition, the
Company had issued $1,911,360 in letters of credit against Line A. These letters
of credit are required as security under building leases in Los Angeles,
Washington, D.C., and Miami.
Line B, as amended, matures on the earlier of September 30, 2000, or 30
days after demand for payment by the bank. Line B requires that the principal
amount outstanding must be reduced to $3,500,000 by July 1, 2000. Line B amounts
outstanding bear interest at the Prime rate plus 2.00%. At March 31, 2000, the
Company had outstanding borrowings under Line B of $4,350,000.
The Company agreed to pay the bank a fixed Arrangement Fee of $750,000, of
which $250,000 was charged to operations in 1999. The remaining $500,000 is
being charged to operations at the rate of $62,500 per month commencing February
2000. This entire Arrangement Fee is payable on the later of (1) the Facility B
termination date or (2) the Termination Date of the Credit Agreement. The
Company also agreed to pay a Contingent Arrangement Fee to the bank equal to:
(a) $200,000 upon failure of the Company to deliver to the bank by April 15,
2000, a letter of intent for the sale of assets or stock of the Company that
generates sufficient proceeds to pay all amounts due to bank and (b) $200,000
upon failure of the Company to deliver to the bank by June 15, 2000, a
definitive executed contract for the sale of assets or stock of the Company that
generates sufficient proceeds to pay all amounts due to bank. The Bank has
asserted that the April 15 requirement has not been met under the terms of the
credit agreement, and the matter is currently under negotiation; thus no amount
has been charged to operations for the contingency fee.
The Credit Agreement requires interest only payments until maturity, except
for the required principal reductions described above. While the Company
believes it will be able to make the regular interest payments, based on
management's current projected earnings and cash flow, its ability to make the
required payments of principal on a timely basis is presently in doubt.
Purchases of property, plant, and equipment for the three months ended
March 31, 2000 were approximately $661,000. These purchases were primarily for:
(1) the completion of the build-out of the Miami campus; (2) customary hardware
and software costs; (3) improvements to the Company's computer facilities and
telecommunications equipment at the corporate level; (4) investments in computer
technology to support information technology curriculum; and (5) increases in
normal recurring capital expenditures due to the overall increases in student
levels resulting from the Company's growth. For the three months ended March 31,
2000, the Company also capitalized curriculum development costs totaling
approximately $74,000. The Company expects to fund capital expenditures for
existing and any future new campuses through cash from operations and, if the
<PAGE> 15
Company is able to obtain sufficient refinancing, through debt or sale of
equity. However, there can be no assurance that the Company will be able to
fund its capital programs.
The Company's ability to fund its working capital and capital expenditure
requirements, implement new programs, make interest and principal payments, and
meet its other cash requirements, depends on, among other things, current cash
and cash equivalents, internally generated funds, the proceeds of the Company's
Credit Agreement, and other loans. Based on current estimates of cash flow, the
Company cannot be certain it will have sufficient cash resources to make
required debt payments and to meet its other cash requirements. The Company is
evaluating various alternatives to address both its liquidity requirements and
the failure as of December 31, 1999 to meet the financial responsibility
standards of the Department of Education. The Company has retained The
Robinson-Humphrey Company LLC to assist in determining short-term and long-term
financial requirements. The Robinson-Humphrey Company LLC and the Company
continue to evaluate various strategic alternatives, which include, but are not
limited to, business combinations, a strategic investment in the Company, or a
refinancing of the Company's debt, or a combination thereof. It is expected such
transactions would inject sufficient capital to alleviate the current liquidity
crisis, correct the ratio deficiencies, and also to post any letters of credit,
if required by the Department of Education. There can be no assurance that the
Company will be able to obtain such funding as and when required, or on
acceptable terms.
The Department of Education requires that Title IV program funds collected
by an institution for unbilled tuition be kept in separate cash or cash
equivalent account until the students are billed for the portion of their
program related to these funds. In addition, all funds transferred to the
Company through electronic funds transfer programs are held in a separate cash
account until certain conditions are satisfied. As of March 31, 2000, the
Company had $121,954 in these separate accounts to comply with these
requirements. These funds generally remain in these separate accounts for an
average of 14 days from the date of collection. These restrictions on cash have
not affected the Company's ability to fund daily operations.
All institutions participating in Title IV programs must satisfy specific
standards of financial responsibility. Institutions are evaluated for
compliance with those standards annually as each institution submits its
audited financial statements to the Department of Education (no later than July
1, 2000 for the Company with respect to the year ended December 31, 1999). The
standards consist of an equity ratio, a primary reserve ratio, and a net income
ratio. An institution that is determined by the Department of Education not to
meet the standards is nonetheless entitled to participate in Title IV programs
if it can demonstrate to the Department of Education that it is financially
responsible on an alternative basis. An institution may do so by demonstrating,
with the support of a statement from a certified public accountant, proof of
prior compliance with the numeric standards and other information specified in
the regulations, and that its continued operation is not jeopardized by its
financial condition. Alternatively, an institution may post surety in an amount
equal to 10% to 50% of the total Title IV program funds received by students
enrolled at such institution during the prior year. Additionally, an
institution would agree to disburse those funds only on a reimbursement basis
(as described below). The Department of Education has interpreted this surety
condition to require the posting of an irrevocable letter of credit in favor of
the Department of Education.
As of December 31, 1999, the Company was not in compliance with the
financial responsibility standards of the Department of Education. The Company
anticipates that it may be required to post an irrevocable letter of credit on
or about July 2000 in the amount of up to approximately $15.0 million, which
represents approximately 50% of the Title IV funds received by students during
the prior year. Approximately 50% of the Company's revenue is derived from
Title IV funds. Failure to post a letter of credit, or reach some other
acceptable agreement with the Department of Education would result in the
termination of the Company as an institution eligible for Title IV financial
aid and would negatively impact future cash flows of the Company and possibly
result in the Company being unable to continue its normal operations.
If the Company were deemed not to meet financial responsibility standards,
or not to be in compliance with good administrative practice with respect to
financial aid, the Company could be required to receive Title IV funds from the
Department of Education under the reimbursement payment method. Under this
method, the Company would be required to first make disbursements to eligible
students and parents through credits to the student's accounts before it
requests or receives funds for those disbursements from the Department of
Education. Any requirement
<PAGE> 16
that the Company operate under the disbursement method would result in an
approximate 30-60 day delay in the receipt by the Company of tuition monies
under Title IV. Failure to finance the resulting additional liquidity needs
could create material working capital shortages for the Company, if the Company
is required to receive payments from the Department of Education under the
reimbursement method. This liquidity financing could be in addition to posting
of a letter of credit in the amount of up to approximately $15.0 million, which
represents approximately 50% of the Title IV funds received by students during
the prior year.
Certain states in which the Company operates have regulatory agencies
which perform their own financial capability reviews on an annual fiscal year
basis, which include fiscal tests. For the year ended December 31, 1999, the
Company was not in compliance with some of these state requirements. Management
believes that, by successfully addressing the financial responsibility
standards of the Department of Education, it will meet the financial
requirements of all the states in which it operates, although there can be no
assurance of such.
IMPACT OF INFLATION
The Company does not believe its operations have been materially
affected by inflation.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
No response is required to this item.
<PAGE> 17
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27 - Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K. No report on Form 8-K was filed during the
quarter ended March 31, 2000.
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EDUTREK INTERNATIONAL, INC.
Date: May 15, 2000 By: /s/ Steve Bostic
--------------------------------
Steve Bostic, President and
Chief Executive Officer
(principal executive officer)
Date: May 15, 2000 By: /s/ David J. Horn
--------------------------------
David J. Horn, Chief Financial
Officer (principal financial and
accounting officer)
<TABLE> <S> <C>
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF EDUTREK INTERNATIONAL, INC. FOR THE THREE MONTHS ENDED
MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
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<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
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